The environmental impact of crypto is discussed, but some options are more environmentally friendly than others.
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Bitcoin is positioning itself as the currency of the future, but its environmental impact remains very controversial. On the one hand, the network consumes huge amounts of energy. Bitcoin mining, on the other hand, can harness energy that would otherwise have been wasted, and there are industry efforts to make better use of renewable energies.
According to City Index market analyst Tony Sycamore, the Bitcoin network consumes as much energy as the country of Argentina, but a decision made by China earlier this year resulted in the country expelling many Bitcoin miners using cheap, coal-based energy .
“The decision … resulted in some miners moving to countries or regions that offer energy at competitive prices from renewable sources or that are offset by emissions certificates,” he told Finder.
However, there are alternatives for traders and investors who are still unsure about Bitcoin’s environmental impact. With that in mind, here are some crypto investments that are arguably better for the environment than Bitcoin.
Ripple (XRP) is one of the most famous cryptocurrencies and has been one of the top 10 tokens by market capitalization for several years. Unlike some of its competitors, Ripple’s consensus mechanism was designed with environmental sustainability in mind.
Due to the unique way it validates transactions, XRP consumes 0.0079 kilowatt hours (kWh) per transaction compared to Bitcoin’s Proof of Work (PoW) protocol, which consumes approximately 707 kWh. That is a difference of almost 90,000%.
This marked difference in energy usage isn’t the only driving factor behind Ripple’s superior sustainability. In September 2020, the Ripple development team, in collaboration with The Energy Web Foundation, committed to fully decarbonising the Ripple ledger and converting its operation to run on renewable energies. This was the first public blockchain to address the environmental concerns of cryptocurrency in this way.
Did you know already? Ripple can be traded as a CFD via City Index. Trade with market spreads from 0.6 and margin rates from 50%.
When comparing some of the most famous cryptocurrencies in terms of raw energy consumption, IOTA is among the best and outputs a relatively low output of 0.00011 kWh per transaction. This is even more energy efficient than XRP and, in context, a device running an IOTA node will consume around 1/200 of the energy that a lightbulb uses in validating a single transaction.
IOTA’s (dubbed Tangle) ledger technology eschews a blockchain in favor of a protocol known as a direct acyclic graph (DAG) that doesn’t involve any of the sustainability issues associated with using miners. The system is designed to operate on small, low-power devices (such as phones or smart devices), which inherently improves energy efficiency.
IOTA’s developers have further committed to becoming aware of climate change with a new upgrade for 2021 known as Chrysalis that aims to reduce its environmental footprint by 60%.
As cryptocurrency evolves, more and more blockchain technologies are moving away from the energy-intensive PoW consensus mechanism used by Bitcoin. The most famous new protocol is the Proof of Stake (PoS) mechanism, which is widely used by many modern cryptocurrencies, including Cardano (ADA).
PoS relies on the use of validators to validate transactions rather than using energy hungry mining hardware. Validators only require ordinary computer equipment to verify transactions and have to deploy a significant amount of assets (in the form of ADA coins) to ensure their honesty. If they attempt to defraud the system, their assets will be confiscated or destroyed, creating a financial incentive to act in good faith.
Although inherently more energy efficient than PoW mining, Cardano (ADA) has implemented a system called Ouroboros that takes it to another level.
According to Cardano founder Charles Hoskinson, the technology only uses around 6 GWh of electricity annually, compared to Bitcoin’s whopping 115,850 GWh.
Although Cardano’s kWh per transaction (0.5749) are less efficient than those of IOTA (0.00011) and Ripple (0.0079), its immense scope for scalability means that even if the blockchain continues to grow, its environmental impact should remain relatively small.
BitGreen is a unique participant on this list. While the other cryptocurrencies were developed with environmental sustainability as a secondary focus, BitGreen is a network built in direct response to Bitcoin’s negative impact on climate change.
Its PoS protocol is not only one of the most environmentally friendly consensus mechanisms in the cryptosphere, BitGreen’s platform actually offers incentives and rewards environmentally conscious behavior.
For example, users can earn a portion of BITG by doing activities like carpooling, volunteering, and drinking coffee from sustainable cups.
Stellar Lumens (XLM)
Stellar (XLM) is one of the older cryptocurrencies introduced in 2014. Developed as a fork of Ripple (XRP), Stellar has incorporated Ripple’s environmentally conscious philosophy into its core principles.
In fact, according to the Poseidon Foundation (a blockchain initiative to reduce the technology’s carbon footprint), XLM transactions use a fraction of the energy that Visa payments consume.
The main difference between Stellar and Ripple is their market. Ripple is focused on bridging the gap between digital and traditional currency for banks, while Stellar is more focused on everyday, global engagement.
Other eco-friendly cryptocurrency investments
Another way to reduce your carbon footprint when investing or trading cryptocurrencies is by trading derivatives. These are indexed to the price of the underlying asset so that no transactions need to be made with the actual cryptocurrencies themselves. This eliminates the root cause of the emissions associated with every transaction.
Of course, this also means that you can’t use the associated cryptocurrency for its intended purpose, but for those who just want to speculate on the price of those assets, this shouldn’t be a problem.
Contracts for difference (CFDs) are a derivative that tracks the price of an underlying asset and allows speculators to go long or short. This allows investors to gain exposure to an underlying asset (such as Bitcoin, Ripple, or Ethereum) in a way that is removed from the computational cost of cryptocurrency transactions.
CFDs are perpetual and can be held for any length of time, using the difference between the entry and exit prices of the underlying asset to determine the profit or loss after the contract is sold.
Cryptocurrency CFDs can be traded through a number of providers in Australia including City Index, where you can trade CFDs on Bitcoin, Bitcoin Cash, Ethereum, Litecoin and Ripple.
Futures are another derivative that crypto investors looking to be environmentally conscious could consider.
Buying futures is basically similar to buying a CFD – they offer exposure to the price of an asset without ever owning the asset. Like a CFD, futures contracts are paid out based on the difference between the start price and the exit price.
The main characteristic of futures is that they are used to speculate on prices over specific periods of time with a set expiration date.
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Disclaimer: This information should not be interpreted as endorsing any futures, stocks, ETFs, CFDs, options or any particular provider, service or offer. It should not be construed as investment advice or a recommendation of any kind. Trading in futures, stocks, ETFs and options carries a significant risk of loss and is therefore not suitable for all investors. Trading CFDs and Forex with leverage carries a higher risk of losing money quickly. Past performance is not an indication of future results. Take your own circumstances into account and seek your own advice before making any trades.